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Monday, December 12, 2011

Mandatory Mediation Clauses: Can You Make the Horse Drink?

By Charlotte E. ThomasSpecial to the Legal

The other day, I was reviewing a production contract for a client from Delaware. When I reached the dispute resolution clause, I had to chuckle.

The contract had an arbitration clause calling for arbitration in Philadelphia. No problem there, provided the client understands the parameters of arbitration. The contract also contained a clause calling for mandatory mediation as a condition precedent to the arbitration. Again, I had no conceptual difficulty with agreeing to mandatory mediation. The sticking point was that the mediation was supposed to take place in Dublin, Ireland. Calling for mediation in Dublin may have made some sense if the production company had been Irish. In fact, its principal office is in Philadelphia. I interpreted the clause as an impediment to dispute resolution, since it would have required Delaware and Philadelphia companies to incur significant overseas travel expense before even commencing the mediation.

This got me thinking: How successful are the mandatory mediation clauses in practice? Typically, such clauses call for a good-faith effort at mediation before one party to a contract in dispute can demand arbitration, although conceivably the mediation condition could precede litigation as well as arbitration. I decided to ask my partner, Richard “Rick” Lowe, who is a Fellow of the American College of Construction Lawyers, both a mediator and arbitrator in Philadelphia and New York, not to mention the Mayor of Swarthmore. He is fresh from teaching a CLE course on the do’s and don’ts of arbitration clauses.

According to Rick, clauses requiring mediation as a condition precedent to dispute resolution have been around for almost a decade. One of the principal benefits of these clauses is that they protect a party that might otherwise suggest mediation from being perceived as “weak” in the context of the dispute (See Exploring Early Settlements: A Sign of Weakness or Ethical Duty?). Of course, both sides can always elect to pump their chests, waive the mediation clause and proceed to arbitration, but mandatory mediation protects the party that prefers to avoid broken ribs. There are limitations, as Rick allowed. A carve-out from a mediation clause for injunctive relief may be advisable in some substantive areas, such as restrictive covenants for employee competition or proprietary customer lists. Injunctive carve-outs are less likely to be needed in other fields, such as construction contracts.

The purpose of the mandatory mediation clause is laudable. The real question is after leading the parties to a good-faith mediation, can you make the horse drink? Do disputes resolve through mediation without resorting afterward to the adversarial tribunal? According to Rick, the clauses do actually promote settlements before arbitration or litigation. While there are no peer-reviewed studies, in Rick’s experience upwards of 80 percent of disputes arising out of contracts with mandatory mediation clauses settle at mediation.

That’s good enough for me. To my client, however, I recommended before signing the agreement that it request a change in the location of the mandatory mediation to Philadelphia, unless, of course, it was looking for an excuse to see Ireland.

Charlotte E. Thomasis a partner with Duane Morris, where she practices in the area of complex business litigation. She represents parties in securities actions, broker-dealer and financial adviser arbitrations, lender liability actions, directors and officers actions, intellectual property lawsuits, environmental and toxic tort actions, actions under 42 U.S.C. § 1983 and the defense of class actions. She can be contacted by e-mailing cthomas@duanemorris.com.

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